A Detour Onto Crazy Street

by John Rubino on September 17, 2012

The world wasn’t exactly placid at the beginning of this year. But lately we seem to have detoured onto Crazy Street. Let’s start with the South China Sea, where everyone, inexplicably, has become obsessed with some barren islands and is apparently willing to trade blood for rocks:

Major Japanese firms have closed their factories in China and urged expatriate workers on Monday to stay home ahead of what could be further angry protests over a territorial dispute that threatens to hurt trade ties between Asia’s two largest economies.

China’s worst outbreak of anti-Japan sentiment in decades led to weekend demonstrations and violent attacks on well-known Japanese businesses such as car-makers Toyota and Honda, forcing frightened Japanese citizens living in the country into hiding and prompting Chinese state media to warn that trade relations could now be in jeopardy.

“I’m not going out today and I’ve asked my Chinese boyfriend to be with me all day tomorrow,” said Sayo Morimoto, a 29-year-old Japanese graduate student at a university in Shenzhen.

Japanese housewife and mother Kayo Kubo, who lives in the eastern Chinese city of Suzhou, said her young family and other Japanese expats were also staying home, frightened by the scale and mood of this weekend’s protests in dozens of cities.

“There were so many people and I’ve never seen anything like it. It was very scary,” she said.

Chinese Foreign Ministry spokesperson Hong Lei said the government would protect Japanese firms and citizens and called for protesters to obey the law.

“The gravely destructive consequences of Japan’s illegal purchase of the Diaoyu Islands are steadily emerging, and the responsibility for this should be born by Japan,” he said at a daily news briefing. The islands are called the Senkaku by Japan and Diaoyu by China.

“The course of developments will depend on whether or not Japan faces up to China’s solemn stance and whether or not it faces up to the calls for justice from the Chinese people and adopts a correct attitude and approach.”

China and Japan, which generated two-way trade of 345 billion dollars last year, are arguing over a group of uninhabited islets in the East China Sea, a long-standing dispute that erupted last week when the Japanese government decided to buy some of them from a private Japanese owner.

The move, which infuriated Beijing, was intended by Japan’s government to fend off what it feared would be seen as an even more provocative plan by the nationalist governor of Tokyo to buy and build facilities on the islands.

In response, China sent six surveillance ships to the area, which contains potentially large gas reserves. On Monday, a flotilla of around 1,000 Chinese fishing boats was sailing for the islands and was due to reach them later in the day, the state-owned People’s Daily said on its microblog.

The weekend protests mainly targeted Japanese diplomatic missions but also shops, restaurants and car dealerships in at least five cities. Toyota and Honda said arsonists had badly damaged their stores in the eastern port city of Qingdao at the weekend.

However, Toyota said its factories and offices were operating as normal on Monday and that it had not ordered home its Japanese employees in China.

Fast Retailing Co, Asia’s largest apparel retailer, said it had closed some of its Uniqlo outlets in China and may close yet more, while Aeon Co Ltd, Japan’s second biggest retailer, is prohibiting its Japan-based staff from taking business trips to China.

Japanese electronics group Panasonic said one of its plants had been sabotaged by Chinese workers and would remain closed through Tuesday—the anniversary of Japan’s 1931 occupation of parts of mainland China, a date that Tokyo fears could trigger another outbreak of anti-Japan sentiment.

Japan warned nationals about large-scale protests in China on Tuesday, while many Japanese schools in cities like Beijing and Shanghai have cancelled classes this week.

Then of course there’s the Middle East eruption over an obscure parody film:

Hundreds rallying around an anti-Islamic film continued protests throughout the Middle East Monday, burning cars and throwing rocks at a U.S. military base in Afghanistan, torching a press club and a government building in northwest Pakistan and clashing with police outside the U.S. Embassy in Indonesia. Police also tried to arrest a hardline Muslim leader — reportedly wanted for violence in Tunisia — who escaped after hiding inside a mosque in Tunis.

The protests were the latest in a week-long wave of violence sparked by the low-budget film, which portrays Islam’s Prophet Muhammad as a fraud, a womanizer and a child molester. Many of the incidents have targeted U.S. diplomatic posts throughout the Muslim world, including one that killed the U.S. ambassador to Libya, forcing Washington to ramp up security in select countries.

Protesters have directed their anger at the U.S. government even though the film was privately produced and American officials have criticized it for intentionally offending Muslims.

In Afghanistan, hundreds of people burned cars and threw rocks at a U.S. military base in the capital, Kabul. Many in the crowd shouted “Death to America!” and “Death to those people who have made a film and insulted our prophet.”

Police officers shot into the air to hold back about crowd of about 800 protesters and to prevent them from pushing toward government buildings downtown, said Azizullah, a police officer at the site who, like many Afghans, only goes by one name.

More than 20 police officers were slightly injured, most of them hit by rocks, said Gen. Fahim Qaim, the commander of a city quick-reaction police force.

Later in the day, protests broke out in other areas of Kabul, including the main thoroughfare into the city, where demonstrators burned shipping containers and tires. The crowd torched at least one police vehicle before finally dispersing, according Daoud Amin, the deputy police chief for Kabul province.

At a separate protest in front of a mosque in southwest Kabul, several dozen people shouted anti-U.S. slogans and called for President Barack Obama to bring those who have insulted the prophet to justice.

The rallies will continue “until the people who made the film go to trial,” said one of the protesters, Wahidullah Hotak.

And last but definitely not least, Israel seems to be inching towards the launch button over Iran’s nukes:

Israel’s Prime Minister Benjamin Netanyahu criticized the United States Tuesday over what he views as a reluctance to decisively act against Iran’s nuclear program, worsening already rocky relations between the two nations.

In a message aimed at the White House, Netanyahu confronted Washington about what factors would provoke a military strike against Iran’s nuclear facilities. Iran maintains the facilities are for peaceful purposes, but Israel says Iran is stockpiling enriched uranium to build nuclear weapons.

“The world tells Israel, ‘Wait. There’s still time,’” Netanyahu said Tuesday. “And I say: ‘Wait for what? Wait until when?’ Those in the international community who refuse to put red lines before Iran don’t have a moral right to place a red light before Israel.”

Later Tuesday, the White House sought to dismiss reports of a rift between Netanyahu and U.S. President Barack Obama.

It said in a statement that the two leaders spoke for an hour and agreed to continue “close consultations” about the situation in Iran.

Israel has always maintained that a nuclear-armed Iran poses a threat to the Jewish state, as Tehran has persistently called for Israel’s destruction.

Netanyahu’s words came the same day as a news report that lends credence to allegations that Iran is running a nuclear weapons program.

The report quoted unnamed diplomats as saying that the UN atomic agency has intelligence suggesting that Iran has advanced its nuclear work.

Diplomats interviewed by the Associated Press alleged that Iran has moved closer to the ability to build a nuclear weapon, expanding its research on the potential capabilities of an atomic warhead.

The intelligence comes from Israel, the United States and at least two other Western countries and was conducted within the past three years, AP reported.

The United States has not heeded Netanyahu’s calls and has said it wants to dissuade Iran from its nuclear work through diplomacy.

The disagreement over how to deal with Iran has boiled over in recent weeks.

Earlier Tuesday, reports said Obama had rejected a meeting with Netanyahu when the prime minister attends the UN General Assembly this month in New York. By Tuesday evening, the White House denied the reports, saying no such plan had been made or rejected.

Earlier this week U.S. State Dpeartment spokeswoman Victoria Nuland said “it is not useful” to set deadlines or outline “red lines.” She also stressed that U.S. President Barack Obama has made it clear that the U.S. will not allow Iran to obtain nuclear weapons.

Some thoughts

On the South China Sea, China is a rising power and Japan is declining, which is, historically, a recipe for trouble. But they do a huge amount of business together and it’s odd that either sees a confrontation as a profitable venture. It’s certainly costing both parties this week in terms of lost production and street security. But they’ve decided that this is the time, and public opinion seems to favor a confrontation, so here we go.

On the Middle East, Ron Paul is clearly right (if there was ever any doubt). The video set off an explosion that was waiting for a lit match. If not this, something else would have set it off. The West simply has no business occupying that (completely incompatible) part of the world, and when the true price of oil is calculated to include the cost of Middle Eastern entanglements we’ll find that it’s vastly more expensive than any other fuel. The southern half of the US could be covered in solar panels for less than we’ll spend on cleaning up this mess in the coming decade.

On Israel/Iran specifically, it’s not clear that there’s a peaceful solution, given the demographics. Muslim populations are soaring and electorates are becoming more resentful and fundamentalist, Israel won’t accept nuclear weapons a few hundred miles away, and the US has absolutely no idea what to do and no money which with to do it.

Now, it’s completely possible that all of the above are negotiated away in the next few months, and everyone everywhere should hope that they are. But if not, each has the potential to change the tenor of today’s complacent markets. An Israeli strike on Iran, for instance, would give us $200 oil and $2,000 gold in a single trading day. And who knows what a stepped-up Japan/China confrontation would do, though whatever it is, it would be bad.

There are two points to all this: First, financial crises produce geopolitical crises. So what we’re seeing is in general terms what we should expect after borrowing tens of trillions of dollars in the past few decades. A bankrupt world is an unstable world.

Second, geopolitical instability just strengthens the investment thesis that derives from excessive debt. In uncertain times, real assets that aren’t someone else’s liability are much better bets than paper promises — and self sufficiency is safer than dependence on government.